Fitch Ratings revised LIPA's credit outlook to negative, citing limited flexibility to deal with the long-term costs of repairing superstorm Sandy's devastation. Although the utility has the ability to charge ratepayers more to pay for whatever costs the federal government doesn't pick up, the firestorm surrounding its handling of hundreds of thousands of power outages could prevent it from doing so, the rating agency said in a report.
"Given the intense political pressure surrounding LIPA's storm response and the authority's historic objective to moderate already high electric rates . . . LIPA's willingness to increase rates may be limited," the report said.
LIPA spokeswoman Elizabeth Flagler said in an email that the agency "is focused right now on the restoration process and will address the cost issues once restoration is completed."
A negative outlook means that the rating agency has identified a downward trend that is likely to result in a downgrade within two years if that trend continues. Just as lower consumer credit ratings increase the cost of borrowing for individuals, lower ratings for LIPA would result in it having to pay higher interest rates when it borrows money to improve the system.
Fitch gives LIPA a rating of A, considered investment grade, on $5.9 billion in bonds. Despite uncertainty over federal reimbursement and future rates, Fitch said the utility is fundamentally strong financially. Its customers are affluent, it has been diversifying its mix of power suppliers and it can set utility rates.
To deal with the current cash needs of repairing damage from Sandy, LIPA has $500 million of cash on hand, authorization to borrow $100 million for short-term needs using commercial paper and it is seeking an additional $500 million of short-term credit.
But those solutions will only carry it through until it gets federal disaster money -- which history shows could take more than a year. Moreover, LIPA presumably will borrow to handle repair costs that the federal money doesn't cover.
New York State created LIPA, a public entity, in the 1980s to take over the Long Island Lighting Company. LIPA completed the takeover in 1998, leaving it with $6.87 billion in debt. LIPA owns the transmission system that provides power for 1.1 million customers; National Grid Plc, a publicly traded company based in London, owns most of the plants that generate power for Long Island.
LIPA expects to pay $569.3 million in debt service -- interest and principal on its debt -- in 2012, according to financial documents. Those debt payments account for 15.4 percent of the utility's $3.7 billion budget.